Friday, September 19, 2008


Let try to explain this another way...

The Fed has approached the current situation with typical Walter Bagehot rules. It is to lend and lend and produce liquidity for those who qualify.

So far only so-so good.

The problem in this cycle is not really liquidity. It's COUNTER-PARTY risk. Making someone liquid does not help him if his competitors aren't sure he is going to last.

The Fed/Treasury need to do something to affect that. Buying bad assets from them may help at some point. But if you pay 'market value' for them you will just force the entity to take their full loss now, upfront. How does that help? If you pay more for the assets than they are worth, you burden the taxpayer.

Risky Business- without Tom Cruise
One way to get market players to regard other market players as less at risky is to relieve them of the burden of their risky Real Estate portfolio. Another way to do that is to STOP the practice of mark-to-market pricing. Letting firms take a longer time horizon to realizing the true value of their holdings IS IN FACT just what that government itself plans to do. So WHY NOT save the bailout and just let banks DO THAT NOW?

I do not understand the desire for this intrusive government tilt to policy when with a little tweak of accounting rules so much more could be achieved. Just let financial firms use their discretion in accounting for real estate value. Let them take a multi year approach if they want. Its sensible. When real estate is out of favor and everyone has losses and everyone is selling you depress real estate prices. Why make people mark to THAT value?

We have already seen that there is no venture captial bid for these assets. That fact should be 'proof' enough' or at least raise a red flag that these assests are selling at depressed prices, below 'true value.' Just because a price comes out of a market does not make t it right. Markets can have distortions too and this one does BIG TIME.

So solve the right problem, not the wrong one. and try not create a new problem while you are at it.

The New proposal has all sorts of side effects; a change in accounting rules would not have those side effects.


Reject this plan and start over.

1 comment:


Before you can fix whats wrong you must first know what is wrong.